*PROBLEM 12-7B (Continued)
(c)
PATEL COMPANY AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 2015
Assets
Current assets ………………………………………….
$1,147,000
Plant and equipment, net
2,253,000
Goodwill …………………………………………………..
50,000
Total assets ……………………………………
$3,450,000
Liabilities and Stockholders’ Equity
Current liabilities ………………………………………
$ 960,000
Stockholders’ equity
Common stock…………………………………..
$1,947,000
Retained earnings ……………………………..
543,000
2,490,000
Total liabilities and
stockholders’ equity …………………….
$3,450,000
COMPREHENSIVE PROBLEM: CHAPTERS 10 TO 12
Part I
From: Joe Student
Date: 5/26/2014
Organization
I have examined your situation regarding the establishment of your business.
Before discussing my recommendations, I would like to briefly review
the advantages and disadvantages of partnerships and corporations.
1. Partnerships are more easily formed than corporations. Partnerships
2. Income from a partnership is subject to less tax than income from
a corporation. Even though partnerships are required to file information
pay taxes on corporate income. In addition, any dividends distributed
by corporations to individuals are subject to personal income tax on
3. Partnerships have more flexibility in decision making. The decision-
making process used in a partnership is determined by the partners,
whereas some decisions required in corporations must follow formal
procedures described in the bylaws of the corporation.
COMPREHENSIVE PROBLEM (Continued)
The primary advantages of a corporation over a partnership are:
1. Mutual agency does not exist in a corporation. This means that the
agreements on behalf of the corporation. Owners of a partnership
2. The owners of a corporation have limited liability. When the
corporation’s assets are not sufficient to pay creditors’ claims, the
demands. A special type of partnership, a limited partnership,
protects the personal assets of limited partners, but at least one
partner.
3. The life of a corporation is unlimited. When ownership changes occur
(e.g., stockholders buy or sell stock), the corporation continues to
exist as a legal entity. When ownership changes occur in a partner-
ship (e.g., existing partner leaves, new partner is added), the old
partnership no longer exists as a legal entity. A new partnership can
be formed and the business can continue, but the original partnership
must be dissolved.
After examining your situation, I believe that you would be wise to
choose the corporate form of business organization. There are two
reasons for this recommendation. The first reason is that the venture
COMPREHENSIVE PROBLEM (Continued)
Part II
Equity financing option:
Positives
Negatives
No fixed interest payments
required
Control of the corporation is lost
Difficulty of finding an interested
investor
Earnings per share are lower
Debt financing option:
Positives
Negatives
Control stays with three
incorporators
No need for additional investor
Earnings per share are higher
Interest payments quickly drain
cash
Shares outstanding before financing 60,000 shares
Equity Financing
Debt Financing
Income before interest and taxes
$300,000
$300,000
Interest expense
—
126,000
Income before taxes
300,000
174,000
Income tax expense
96,000
55,680
Net income
$204,000
$118,320
Shares outstanding after financing
200,000
60,000
Earnings per share
$ 1.02
$ 1.97
Part III
(c) (1) 6/12/14 Cash……………………………………… 100,000
COMPREHENSIVE PROBLEM (Continued)
7/21/14 Cash ………………………………………. 900,000
7/27/15 Stock Dividends
(150,000 X .10 X $3) ……………… 45,000
7/31/15 No entry
8/15/15 Common Stock Dividends
12/4/15 Cash Dividends
12/14/15 No entry
(2) Shares Issued and Outstanding
Date
Event
Number of
Shares Issued
Total Shares
Issued and
Outstanding
6/12/14
7/21/14
8/15/15
Issuance to Incorporators
Issuance to Hansen
Stock dividend issuance
60,000
90,000
15,000
60,000
150,000
165,000
Part IV
(d) (1) 6/1/16 Cash ……………………………………… 548,000
COMPREHENSIVE PROBLEM (Continued)
(2) 12/1/16 Interest Expense ……………………………… 20,600
(3) 12/31/16 Interest Expense ……………………………… 3,433
(4) 6/1/17 Interest Payable ………………………………. 3,000
Part V
(e) (1) 2014 Stock Investments …………………….. 900,000
Stock Investments …………………….. 18,000
Cash …………………………………………. 1,260
2015 Stock Investments ……………………… 42,000
COMPREHENSIVE PROBLEM (Continued)
2016 Stock Investments……………………. 63,000
Cash ……………………………………….. 30,000
(2)
Stock Investments
900,000
18,000
42,000
63,000
1,260
12,000
30,000
979,740
BYP 12-1 FINANCIAL REPORTING PROBLEM
(a) Percentage increase from 2010 to 2011:
(b)
(1) Purchases of marketable securities during the year:
$244 million.
BYP 12-2 COMPARATIVE ANALYSIS PROBLEM
(a)
(in millions)
PepsiCo
Coca-Cola
1.
Cash used for investing activities
$5,618
$2,524
2.
Cash used for capital expenditures
(spending)
3,339
2,920
interest.
As for specific corporations consolidated, PepsiCo lists the following
companies as its principal divisions.
Frito-Lay North America